Question

The Laffer curve shows that higher personal income tax rates will not necessarily produce more tax revenue.'' Critically discuss this statement using diagram.

Answer 1

Laffer curve explanation

From the graph when the tax rate is at 0% there is no revenue for the government. When the government imposes the tax rate, the revenue increases until point T. Beyond point T an increase in tax rate leads to a decrease in revenue because people will not work as much or at all hence reducing total revenue. Therefore T is the optimal tax rate any government should reach.